Friday, October 7, 2016

"About Those Hurricane Matthew Stock Tips…"

Discerning reader will note we haven't had any "How to trade the hurricane" posts.
The general rule is don't trade the hurricane unless you have a time machine:

Time Machine from The Time Machine (and BBT)

and can go back to April 15th and the post La Niña and the Hurricane Season:
One of our ideas for later in the hurricane season (June 1-November 30, peak Sept. 10) is to bet against the insurers and reinsurers. Some of the P/C insurers with East Coast exposure: CB; TRV; ALL; HIG; SIGI....
The thinking was that the death of El Niño, combined with industry overcapacity leading to underpricing of risk and QE destroying any fixed income return from the float, that the insurers were climbing uphill.

An equal-dollar short of each of those five stocks on April 15 through the Oct 4 close (the last time we checked) went against you, but not much with the stocks up an average of 1.622% versus a gain in the S&P of 3.25%, a difference significant enough to make a bit of a hedge.

The short looks even better if measured from the close the day before the start of the hurricane season, May 31. From that day through Oct. 4 the basket was down 2.63% vs a gain in the S&P of 2.45%

The other hurricane trades, short REITs, long retailers (Home Depot, Lowes) etc. trade mainly on emotion that is usually best to fade.

The only 'cane trade I can think of that actually had legs was electrical generator company Generac which moved up as extra-tropical storm Sandy approached New York in 2012 and continued higher as folks came to understand the problems of a storm making landfall at the full moon high tide.
They sold a lot of generators in the next 18 months.

Finally, it used to be the surest trade was to buy the insurers as the damage was being assessed in anticipation of rate hikes but that is something we probably won't see as there is still so much capacity from the Property/Casualty folks, the reinsurers and insurance-linked securities like Cat bonds.

Just a note, insurance stocks like the Travelers are up because Matthew did less damage than forecast which is pretty funny as Travelers and I think Allstate pulled out of the Florida market and have no exposure anyway.

Here's the headline story from Barron's:
Tune out advice about how weather damage might affect insurers, home improvement chains and restaurants.
Here’s a Hurricane Matthew stock-trading idea: Don’t buy and sell stocks based on approaching storms. That’s not an ethical judgment. Simply put, investment tips based on how weather damage will affect home improvement chains, insurers, restaurants and oil refiners are mostly folly.

Storm systems are chaotic and difficult to forecast. Even if they weren’t, the lingering effects of storm damage on commerce are sometimes counterintuitive. That didn’t stop investors from sending Home Depot shares (ticker: HD) 2% higher during a broadly flat session for stocks Thursday after Matthew intensified to a Category 4 hurricane with 140 mile-per-hour winds headed for Florida.

The trading rationale for Home Depot, no doubt, is that homeowners in coastal areas will rush to stores to stock up on plywood, generators, bottled water and more. That’s probably right, but not likely relevant. In years like 2004, when Hurricanes Charley, Frances and Ivan battered the Southeast, the result for Home Depot was indeed a related rise in same-store sales. But the sales rush comes with a hike in expenses for things like store damage, freight and employee overtime. The net result of storms on Home Depot’s earnings has often been neutral, according to JPMorgan analyst Christopher Horvers.

Meanwhile, Home Depot’s earnings per share expanded at a compounded rate of over 20% a year over the past five years. Shares returned 34% a year, on average. Compared with buy-and-hold investors, traders who bought and sold on storm effects over that stretch were chasing the wind.

Insurers are an obvious target for storm trades. Allstate (ALL), Travelers Companies (TRV) and Chubb (CB) are among those with exposure to the Southeast. But insurers often lay risk off to reinsurance companies, like Everest Re Group (RE) and RenaissanceRe (RNR). Both stocks fell Thursday, even though after Hurricane Sandy in 2012, both traded in line with the broad market, gaining more than 20% over the following year. Why? Reinsurers are in the business of absorbing catastrophic losses. Even when those losses cut into reserves, the industry simply raises premiums to replenish their funds.

The impact of storms on oil refiners can be mixed. UBS analyst Spiro Dounis noted in a Wednesday report that PBF Energy (PBF), whose shares fell 4% Thursday, has infrastructure in harm’s way, while companies like Marathon Petroleum (MPC) and Valero Energy (VLO), whose shares nudged higher, could benefit from shortages in refined products. But in the same report he cautioned that the price of that most important of refined products, gasoline, fell after Hurricane Sandy, even as supplies fell. Demand took an even bigger hit from damaged roads and reduced driving. And fuel stockpiles today are higher than before Sandy....MORE
We made the insurer point for different reasons over the course of 2016, here are a few:

January 28, 2016
"Is the re/insurance industry really prepared for a large tail event?"

The plan is to lay any claims over about $50 billion on taxpayers.
That's insured losses not total losses.
Short the re/insurers this year. The probabilities are shifting against them and although it's not a lock it is still the way to bet....
Feb. 2016
"Reinsurance cycle won’t turn until there’s “blood in the streets”: Bernstein" 
A combination of lousy pricing and the risk of a touch of La Niña this hurricane season makes the re/insurance biz ripe for shorting.... 

March 21
Hurricane Risk and Insurance Pricing Coming Into the 2016 Season